The threat of an unprecedented U.S. debt crisis is rapidly diminishing, and the world economy appears to have avoided a major shock. But there are still many dark clouds looming over the global economy.
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| High inflation, rising interest rates and slow growth are still major challenges for the world economy. (Source: Visual Capitalist) |
Difficulties have not disappeared
On May 31 (local time), the US House of Representatives passed a bill to suspend the loan limit for 5 years. The bill was passed just days before the US is likely to default on its public debt for the first time. Thus, the US and the world can avoid an immediate crisis. But a series of problems such as high inflation, rising interest rates and sluggish growth have not gone away.
“Even excluding the worst-case scenario, we are still looking at a global recession scenario,” said Carsten Brzeski, head of global macro research at Dutch bank ING.
There is evidence that economic growth is slowing in the US and China - the two largest economies in the world.
The US economy grew much lower than expected in the first quarter of 2023.
Meanwhile, the latest data shows that factory activity in China in May 5 fell to the weakest level since the country ended the "Zero Covid" policy five months ago.
As such, China's economic recovery is losing momentum, hampered by weak domestic demand, rising unemployment and a deep slump in the property sector.
This affects Germany because China is its most important trading partner. Germany fell into recession when economic growth was negative for two consecutive quarters (fourth quarter of 2022 and first quarter of 2023) as the energy price shock last year affected consumer spending.
Germany is the largest producer, exporter and consumer in Europe. So a prolonged slowdown in Europe's largest economy would spell trouble for the rest of the region, which has narrowly avoided recession since the start of the year.
Besides, momentum in France, which has had a strong economic recovery since the Covid-19 pandemic, is also slowing. Official data shows that, in April 4, consumer spending in the country fell for the third consecutive month.
Inflation is too high
In the past time, inflation has eased in France – as it has declined in Germany, Spain and Italy.
Data released on June 1 showed that eurozone inflation fell more than expected in May 6 due to a slowdown in core price growth. Inflation in the 5 eurozone countries fell to 2023% in May 20, from 6,1% in April 5 and lower than the 2023% forecast by economists polled by economists. Reuters given.
Inflation has also come under control in the UK and US – 8,7% and 4,9% respectively – but it remains uncomfortably high for central banks, which aim to keep inflation at 2%.
Many investors expect that central banks will raise interest rates further in the coming weeks to tame price increases. However, both of these issues act as drags on the economy.
Inflation increases the cost of everyday goods and services, reducing people's consumption. At the same time, rising interest rates have made loans and mortgages more expensive, putting pressure on business and household spending.
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| Inflation has not cooled down in many countries. (Source: Getty Images) |
The effects of higher borrowing costs are not yet fully felt by many.
A wave of defaults between US and European companies is "imminent" due to the tightest monetary policy in 15 years, combined with high debt levels and low profitability, private bank Deutsche said. This wave could last until the end of 2024, Deutsche analysts say.
Analysis by Capital Economics also demonstrates that, to date, less than half of the impact of monetary policy tightening in developed markets has been felt in the real economy.
“As financial conditions tighten, we expect most major advanced economies to slip into recession and experience wage pressure,” said Neil Shearing, chief economist at Capital Economics. The recessions we forecast are relatively mild and should probably be considered a 'soft landing' given the high inflation over the past year.
Two long-term threats
Any recession, however mild, will turn out to be worse for the world economy. Recession can occur in many countries because of inflation and can arise from two long-term threats, the special military operation in Ukraine and the climate crisis. These two issues will pose risks to global supply chains and food prices.
Neither Russia nor Ukraine has signaled an end to the more than year-long conflict. Last year, this particular military campaign pushed food prices around the world to all-time highs. Although prices have fallen since, they are still high in many countries and cause famine in poor countries.
Besides, the climate crisis threatens many European countries. For example, floods that devastated Northern Italy last month engulfed thousands of farms in one area of the country. The "once in a hundred years" disaster occurred after years of severe drought in the region, which compacted the soil, reducing its ability to absorb rainfall.
Another severe drought in Southern Europe could also make the situation worse. "Spain's arid soils and severe drought are affecting many crops and threatening to drive up food prices in many European Union countries," said agricultural data company Gro Intelligence.
